Chapter 2: Measuring economic growth and development (Rach)
2 Broad methodologies of development:
1) The income per person, or economic growth criterion: suggests that income levels are
reasonably good approximate measures for comparing economies. In this view, income per
person can serve as a surrogate for gauging over progress.
2) Development is such a complex, multi-faced notion that it should be conceived from the
outset as considerably broader than income and hence can only be measured by entirely
The economic growth/income criterion of development:
− The rate of growth of income per person can be used to judge the progress of economies over
− Societies may value goals as diverse as:
− Equality of opportunity;
− A rising income and standard of living, incl. a wider array of consumable goods and
services over time;
− Equity in the distributions of income and wealth;
− Political democracy and widespread participation in society's decision-making;
− An expanded role for women, minorities, and all social classes in economic, political, and
− Increased opportunities for education and self-improvements in, health care;
− Public and private safety nets to protect the most vulnerable – particularly the young, the
old, the infirm and the poorer – from extreme hardship;
− A reasonably clean and healthy environment;
− An efficient, competent, transparent, and fairly administered public sector;
− A reasonable degree of competition in the private sector; and so on.
− Less-developed countries are less developed precisely because the produce, sell, and export a
sub-optimal array of goods and services in inefficient ways.
− Wholesale social and economy-wide transformations are essential.
− The full range of development goals of any nation goes far beyond any simple concern with the
level of income per person.
− It's convenient and simpler to use income per person as a substitute gauge for broader goals of
Measuring economic growth:
− Gross national income (GNI):
− Total value of all income accruing to residents of a country, regardless of the source of that
income; irrespective of whether such income is derived from sources within or outside the
− The income received by residents of that country
− All income received by residents of a country and available for use.
− Gross domestic product (GDP):
− The total value of all income (= value of final output) within or outside the country, regardless of
whether the ultimate recipient of that income resides within or outside of the country.
− Income produced w/in the borders of the country
− All income created w/in a country regardless of who received it. How and why GNI and GDP measures of income differ?
- No difference in an economy completely “closed” to the rest of the world.
- Closed = there is no migration of workers and no flows of investment b/w a country and the rest
of the world.
- Exports & Imports of goods do NOT affect the measurement of GNI or GDP since trade flows
don’t have anything to do with differences in values of the 2 income measures.
- BASICALLY…no labour or investment flows between economies if GNI is = to GDP and an
economy is to be considered ‘closed’.
o If the economy were ‘closed’then the only income that would be received by residents of
a country would be derived from new productive activity taking place w/in the borders of
o No income received by residents inside the country originating from sources outside of
the country and no flows of income created w/in the borders of the country going to
income recipients in other nations.
In this case GDP = GNI
Income floes between economies and GNI and GDP
- An economy’s GNI will typically diverge (differ) from its GDP.
- 2 types of income inflows
o Inflow from outside the economy/country
o Income flow between nations
- Income inflow with resources making money outside of the country
o Ex. US has many corporations and bank loans to other countries and financial investments
- Income flow between nations: money being made inside a country and money being sent back to
a person’s homeland for families. Migrated workers.
o Ex. Mom left the Philippines to immigrate to Spain when she was 16 to work and send
money back to her family, then after a million years immigrated to Canada to find a better
job…and still sometimes sends money back to whatever family we have in the
- Acountry’s GDP < GNI or its GDP > GNI depends on the sum of all the income inflows into the
country from the rest of the world (ROW) less the sum of the income leakages leaving the
country and flowing ROW.
- When income inflows received by a country from the ROW exceed the income outflows to the
ROW then that country’s GNI > GDP.
o Income from ROW are GREATER than income outflow to ROW = GNI > GDP
- When the income inflows from the ROW are smaller than the income outflows to the ROW, then
GDP > GNI for that country.
o Income from ROW is LESS than income outflow to ROW = GDP > GNI
Necessary adjustments to the GDP and GNI measures
1. Adjusting for population size
• This population adjustment is essential for two reasons